Budget Reconciliation in the 105th Congress: Achieving a Balanced Budget by 2002

Achievement of a balanced federal budget by 2002 was a high priority for the 105th Congress and the President. After months of negotiations and debate, starting in February 1997 and ending in July 1997, congressional leaders and the White House forged a consensus on legislation to accomplish this goal. The legislation, signed into law by President Clinton on August 5, 1997, sets “caps” on discretionary spending, constrains entitlement programs, and on balance reduces federal taxes.

Last spring the White House and congressional negotiators reached an agreement on a broad outline of tax and spending changes. As announced on May 2, 1997, the plan envisioned an estimated $190 billion in cumulative deficit reductions over the FY1998-2002 period. When coupled with lower interest payments (arising from the reduced need to borrow) the federal budget would reach approximate balance in 2002.

As reflected by wide margins of passage of the FY1998 budget resolution, the plan generally garnered broad congressional support. Its proponents pointed out that it fulfilled major promises made by both parties, and if successful, it would lead to a budget surplus for the first time since FY1969. While each party wanted fulfillment of more of its respective policy agenda, proponents argued that it struck a viable set of compromises and avoided the budget gridlock that plagued attempts to enact a budget plan in the 104th Congress. Some of its critics complained that its impact was delayed and too small and relied too heavily on lower current law deficit estimates made by the Congressional Budget Office. They contended that not enough was being proposed to rein in long-range entitlement spending, which is expected to rise significantly when the post World War II baby boomers reach retirement age. Others contended that the tax reductions were skewed too heavily toward higher-income people and that the revenue losses would grow dramatically in the long-run.

The budget resolution called for two reconciliation bills, one on spending (H.R. 2015), a second on taxes (H.R. 2014), which both chambers took up and passed in June 1997. After resolving differences in their respective bills, as well as issues raised by the Administration, both chambers passed final versions at the end of July. The President signed them into law as the Balanced Budget Act of 1997 (P.L. 105-33) and the Taxpayer Relief Act of 1997 (P.L. 105-34) on August 5, 1997.

The legislation includes spending reductions totaling $241 billion over the first 5 years, offset by $46 billion in new spending initiatives and a net $80 billion in tax reductions. Almost half of the spending reductions was to result from limiting growth in the federal government’s largest health benefit programs, Medicare and Medicaid ($112 billion in Medicare and $7 billion in Medicaid). Another 37% was to come in discretionary programs by constraining their growth at levels below inflation. Other savings were to come from auctioning licenses for using a portion of the airwaves for wireless communication services, increases in federal agency and employee contributions to the Civil Service Retirement Fund, various changes in veterans programs, and cuts in student loan programs.